Why the Dow Is Getting Absolutely Slammed

So much for crystal balls and fortune-telling.

A day after analysts and commentators proclaimed that a resolution to the presidential election would fuel a widespread stock market rally, the Dow Jones Industrial Average (INDEX: ^DJI  ) is down a whopping 267 points, or over 2%, in intraday trading.

How could they have gotten it so wrong?
Putting Wall Street's motives to the side, according to my colleague Morgan Housel: "History makes one thing clear: There is little correlation between elections and stock performance -- particularly in the short-run."

So there you go. If you're lucky enough to remember this lesson four years from now, you can confidently ignore the hoopla when the next president is elected.

But returning to the present, the good news is that, regardless of who won the election, the economy is bound to do better over the next four years than it did over the past four. To cite Morgan again: "Housing construction and auto sales are set up for a big rebound, the boom in domestic energy production is simply staggering, and household debt payments to income are at the lowest level in almost two decades. The tailwind of those three combined shouldn't be underestimated."

The bad news is that sundry challenges remain ahead, many of which can only be resolved through bipartisan action. The most notable of these is the so-called fiscal cliff. At the beginning of next year, hundreds of billions of dollars' worth of tax increases and spending cuts take effect. Thus, if you thought the election would offer a break from the insufferable political bickering and gamesmanship that we've had to endure over the last few months, then think again.

Of all the constituencies that are disappointed by the results of the election's outcome, few are likely more disappointed than the kings of capital on Wall Street. This is revealing itself today in the performance of bank stocks. Leading the Dow lower are Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) , down by 6% and 5%, respectively. Also struggling are well-known mortgage REITs like Annaly Capital Management (NYSE: NLY  ) and American Capital Agency (Nasdaq: AGNC  ) , both of which are lower by more than 4.5%.

Many expect the election's outcome to foretell the continuation of monetary easing given the president's power to select the chairman of the Federal Reserve. Over the last year, the current chairman, Ben Bernanke, has aggressively sought to drive down long-term interest rates. But while this move lessens borrowing costs to consumers like you and me, it simultaneously compresses the interest rate margin that many financial companies rely on to make money.

It was for this reason that many of Wall Street's most elite institutions lined up to support Mitt Romney for presidency. As fellow Fool Amanda Alix observed earlier this week, among the top contributors to Romney's campaign are Bank of America, JPMorgan, Goldman Sachs, and Morgan Stanley, to name only a few.

Meanwhile, Obama's top corporate contributors were largely technology companies. Microsoft and Google featured prominently on the list, as did Apple and IBM.

The Foolish bottom line
For investors concerned about the market's performance today, I'll leave you with one thought: The market's reaction today is of a short-term variety that simply doesn't change the fundamentals. These gyrations are caused by traders placing wagers and taking profits. As my colleague Dan Caplinger said about Hurricane Sandy (emphasis added): "Whether you're in an area affected by Hurricane Sandy or are simply watching from the sidelines, think twice before you invest based on its impact. Before you know it, Wall Street will have forgotten about the storm, and you'll be left with positions that may not have much appeal after the bad weather dies down."

The much better approach is to know the companies you're investing in inside and out. To do this with respect to Annaly Capital Management, simply click here to download our in-depth report on the high-yielding mortgage REIT.


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  • Report this Comment On November 07, 2012, at 12:41 PM, rebozo2 wrote:

    The last two paragraphs were the most telling: Banks, which manipulated and gambled with wealth, peddled toxic assets and caused major problems to the world economy and saw Mr. Romney as a soft touch; Businesses, which actually produce tangable products with public benefit, want out of a hole THEY didn't dig and supported Mr. Obama.

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